Class 2: The Business Model
MG106 Strategic Management
José Ignacio González Rojas
London School of Economics and Political Science
June 25, 2025
Today’s Focus
The Business Model Framework
| WHO | Who is the paying customer? |
| WHAT | What value do we offer? |
| HOW | How do we create and deliver it? |
Every business is a unique WHO-WHAT-HOW combination
Your Mission
Four Questions to Explore
- What was Blockbuster’s business model?
- What was Netflix’s entry strategy?
- How did Netflix evolve its model?
- Why did Blockbuster’s response fail?
You have 15 minutes to discuss ALL questions with your group
Discussion Time
Use the WHO-WHAT-HOW framework
Let’s Explore Together
Question 1: Blockbuster’s Empire
What did you discover about their model?
WHO did Blockbuster serve?
What about their offering?
WHAT did customers get?
And their delivery method?
HOW did they operate?
Blockbuster’s Model Revealed
WHO
- Impulse renters
- “Movie night” families
- Convenience seekers
WHAT
- Latest releases (70%)
- 2-3 day rentals
- Late fees ($600M/year)
HOW
- 9,000+ stores
- “10-minute drive”
- Part-time staff
This model printed money… until it didn’t
Question 2: Netflix Enters
What was Netflix’s initial approach?
How did they answer WHO-WHAT-HOW?
The Key Question
Was Netflix cheaper than Blockbuster?
Was it more convenient?
So why would anyone use it?
Netflix 1.0: The Reality
The Model
- WHO: DVD early adopters
- WHAT: DVDs by mail, $4 + $2 shipping
- HOW: Website + USPS
The Problem
- Same price as Blockbuster
- 3-5 day wait each way
- Still had late fees
- Tiny DVD selection in 1997
This model FAILED spectacularly
The Customer Experience
“Why would I wait when Blockbuster is down the street?”
Question 3: The Evolution
What changes did Netflix make?
Think about each version…
What customer problem did they solve?
The Big Innovation
What was revolutionary about
“unlimited rentals, no late fees”?
Evolution Timeline
1997 - FAILURE
📀 DVD by Mail • $4 + shipping • Late fees
1999 - BETTER
📀 Subscription Model • 4 movies/month • Prepaid
2000 - BREAKTHROUGH
🎯 Unlimited Plan • 3 at a time • NO late fees
2001 - DOMINATION
🚀 Distribution centers • Overnight delivery • Recommendations
The Breakthrough Moment
Version 3: The Game Changer
The Innovation
- Unlimited rentals
- NO late fees
- Keep 3 movies at home
- Swap anytime
Customer Psychology
- “Movies always available”
- No pressure to watch
- No penalty for life getting busy
- Feels like ownership
They turned the disadvantage of delivery time into an advantage
Two Hidden Weapons
What else did Netflix develop?
Think about:
- How did they recommend movies?
- How did they improve delivery?
The Complete Arsenal
Recommendation System
- Personalized suggestions
- Filtered out unavailable titles
- 70% rentals from back catalog
- ¾ star higher satisfaction
Distribution Network
- Started: 1 center (Sunnyvale)
- Expanded: 44 centers by 2007
- Result: 90% overnight delivery
- Game-changing convenience
Both innovations reduced costs AND improved service
Question 4: Blockbuster Strikes Back
When did Blockbuster respond?
What did they do?
Why do you think it failed?
The Critical Question
Could Blockbuster afford to match Netflix?
Think about their cost structure…
The Timeline of Denial
2002: “Online rental serves a niche market”
2004: Finally launches Blockbuster Online
2005: Eliminates late fees (loses $600M revenue)
2007: Total Access (online + stores)
2010: Bankruptcy
What went wrong?
The Fatal Flaw
Blockbuster’s Impossible Math
Cost Structure
- 9,000 stores = massive rent
- 60,000 employees
- Inventory in every location
- Can’t close stores (Total Access)
The Dilemma
- Match Netflix = lose money
- Keep prices high = lose customers
- Close stores = lose identity
- Result: No way to win
Different business models have different economics
Let’s Compare
How would you summarize the differences?
Think WHO-WHAT-HOW…
The Final Comparison
| Blockbuster | Netflix | |
|---|---|---|
| WHO | Impulse renters | Movie enthusiasts |
| WHAT | Instant gratification | Unlimited entertainment |
| HOW | Physical stores | Distribution + algorithms |
| Revenue | Rental + late fees | Subscription |
| Cost Base | High (stores) | Low (warehouses) |
| Inventory | Distributed | Centralized |
Same industry, completely different games
Key Lessons
1. Business Models Evolve
Netflix transformed 4 times in 4 years
Each change solved a specific customer problem
2. Question Everything
Blockbuster’s Assumptions
- Movies = impulse purchase ❌
- Customers need instant access ❌
- Late fees are acceptable ❌
Netflix’s Questions
- What if people planned movie watching? ✓
- What if “always available” > “right now”? ✓
- What if no late fees = more rentals? ✓
3. Structure Drives Behavior
Blockbuster: 9,000 stores → Had to defend them → Couldn’t adapt
Netflix: No stores → Free to innovate → Could experiment
Your assets can become your prison
4. Small Changes, Big Impact
The Power of “No Late Fees”
- Removed customer anxiety
- Increased satisfaction
- Enabled new usage patterns
- Destroyed Blockbuster’s profit model
Sometimes one element changes everything
5. Disruption Starts Small
For Your Project
Think Business Model First
- Map the WHO-WHAT-HOW of your company
- Identify what’s unique about their combination
- Look for evolution - how has it changed?
- Question assumptions - what did they challenge?
Great strategies often break “industry rules”
Before Tomorrow
Essential Preparation
READ THE COLA WARS CASE
Tomorrow: How two companies
succeeded with different models
in the same industry
The End
Remember: Today’s industry giant
can be tomorrow’s cautionary tale